Optim says Blackstone 'manufactured' a $190m claim over a coal contract

Blackstone bought both a Texas power plant and its supplying lignite mine

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Optim Energy LLC told its bankruptcy court on Jan. 22 that the ignite coal supplier to the Twin Oaks coal plant, which is now controlled by the same party that bought the power plant last year, has lodged a "manufactured" $190m claim against it over the lignite supply contract for that plant.

Optim Energy and its affiliated debtors objected at the U.S. Bankruptcy Court for the District of Delaware to the proofs of claim filed by Walnut Creek Mining Co., which assert general unsecured claims against Optim Energy Twin Oaks LP and Optim Energy in the amount of $190m, based upon alleged damages arising from the Debtors’ rejection of the Fuel Supply Agreement.

Major Oak Power LLC, a special purpose vehicle controlled by The Blackstone Group LP, was the successful bidder for the Twin Oaks plant. The purchase price (not including contractual adjustments) was $126m. An express condition of Blackstone’s bid was the rejection of the Fuel Supply Agreement between Twin Oaks and Walnut Creek.

"Indeed, Blackstone reviewed and approved the Rejection Motion (defined below) before it was filed," Optim wrote. "The rejection of the Fuel Supply Agreement serves as the sole basis for Blackstone’s claims. In addition, two days before the § 363 auction, Black Walnut LLC ('Black Walnut'), another special purpose vehicle controlled by Blackstone, entered into an agreement to purchase the Walnut Creek mine from Kiewit Mining Group, Inc. ('Kiewit'). Black Walnut’s agreement to purchase the mine was expressly contingent upon Blackstone purchasing the Twin Oaks plant on the terms set forth in the purchase agreement between Major Oak and Twin Oaks, which, as mentioned above, included the rejection of the Fuel Supply Agreement with Walnut Creek. Within two weeks of closing the sale on the Twin Oaks plant, Blackstone closed on its purchase of Walnut Creek. Since then, Blackstone has exerted sole control over the entities on both sides of the Fuel Supply Agreement and the fuel transactions between them. Accordingly, any future gain or loss realized by Walnut Creek on transactions between Walnut Creek and the Twin Oaks plant are solely in the control of Blackstone.

"Blackstone has manufactured a massive alleged claim in an effort to disrupt the Debtors’ ongoing reorganization efforts," Optim added. "The Debtors respectfully submit that the Rejection Damages Claim should be disallowed because, inter alia, (i) as the Twin Oaks plant and the Walnut Creek mine are under the common control of Blackstone, all of the economic margin and profit available is being captured by Blackstone and there are no actual damages; (ii) as Blackstone required the rejection of the Fuel Supply Agreement as a condition of purchasing the Twin Oaks plant, Blackstone should not now be allowed to claim damages from that rejection; (iii) the proofs of claim do not provide support for the purported damages of over $190 million; and (iv) Blackstone cannot demonstrate, as required under Texas law, that it actually suffered damages, or establish with reasonable certainty any alleged lost profits. Blackstone has completely ignored the Debtors’ repeated requests for additional information regarding its proofs of claim. Thus, the Debtors intend to seek discovery in advance of any hearing on this matter, and reserve the right to supplement, update and/or amend this Objection accordingly."

Optim Twin Oaks had owned and operated a coal-fired generating facility in Robertson County, Texas. Twin Oaks purchased the vast majority of its coal from Walnut Creek, the operator of an adjacent lignite mine, under a long-term fuel supply agreement originally executed in 1987. On Aug. 7, 2014, the court entered an order approving the sale of the Twin Oaks Plant to Blackstone, which had won an auction for the facility. Optim and its affiliates had entered chapter 11 protection in February 2014.

Optim says Blackstone can 'manipulate' the size of the claim

Said Optim in the Jan. 22 filing: "Given its dominion and control over both entities, Blackstone controls the price that one affiliate charges the other and can easily manipulate the amount of its alleged claim simply by lowering the price of fuel. Upon information and belief, the plant and mine have entered into a replacement fuel supply arrangement that cuts the fuel costs of the plant by almost 50%, and sets the fuel price near or at the mine’s cost of extracting fuel from the ground."

The "information and belief" statement from Optim is based on a Nov. 6, 2014, evaluation by Moody's Investors Service of a company related to this transaction. That Moody's report, which is attached to the Jan. 22 court filing, said: "The addition of the Twin Oaks plant, despite operating on a fully merchant basis, will add fuel and dispatch diversification given its attractive operating cost profile. With mine lifting costs around $1.10 per million British thermal units (MMbtu), the plant's fuel costs are nearly half of previous levels, enabling dispatch most hours of the year. Historically the plant has averaged close to 80% capacity factors and we expect the unit to run closer to 85% and at times, near 90%. We recognize Twin Oaks had lower dispatch recently but this was attributed to an out of market fuel contract which contributed to the bankruptcy of the prior owner. On a go forward basis, we calculate Twin Oaks will contribute an additional $15-20 million annually in cash available for debt service over the next two years given a number of capex projects but ultimately will provide meaningfully more uplift thereafter as the market tightens and capex requirements lighten. We further note Twin Oaks acts as an additional insurance policy against the fully hedged gas-fired plants. In the event of an outage in which a hedged plant is called to run, Twin Oaks can earn the margin in the open market to offset the losses associated with replacement power costs."

That Moody's report was on Lonestar Generation LLC, which is 100% indirectly wholly owned by funds managed by Blackstone. The Lonestar portfolio at that point consisted of two efficient combined cycle plants and one cogeneration facility: the 495-MW Frontera facility in Mission, Texas (two miles from the Mexican border); the 540-MW Bastrop facility just outside Austin, Texas, and the 260-MW Paris facility in Paris, Texas, near the Oklahoma border. As of the date of the Moody's report, Lonestar was setting up the finances to cover the cost of acquiring both the 310-MW Twin Oaks plant and Walnut Creek Mining.

The bankruptcy court isn't due for a hearing on this dispute until April 22.

Barry Cassell
About the Author

Barry Cassell

Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 26 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.

Barry can be reached at barryc@pennwell.com.

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